The Bank of England raised interest rates from 0.25% to 0.5%.
Members of the nine-member Monetary Policy Committee (MPC) raised rates from 0.25% to 0.5% as the Bank’s quarterly forecast is expected to show eye-popping inflation this spring.
It was the Bank’s first consecutive hike since June 2004, after it raised rates from 0.1% to 0.25% in December in an attempt to rein in runaway inflation.
Financial markets are now pricing in four hikes in 2022, which would see rates hit 1.25% by the end of the year, with another hike to almost 1.5% by next spring – the level the highest since January 2009.
The Bank is taking steps to bring inflation back to its 2% target, even though Omicron hit the economy in December and early January.
Consumer price index (CPI) inflation already hit a nearly 30-year high of 5.4% in December and painful energy price hikes are expected to push it past 6 % this spring.
Martin Beck, chief economic adviser to the EY Item Club, said: “Certainly the Omicron variant has almost certainly weakened the economy due to greater consumer hesitancy and an increase in the number of isolated people.
“But the fact that the MPC raised the discount rate in December still indicates that the committee gave less weight to the virus. And recent developments are likely to reinforce this position.
The hit to growth has likely been “more modest” than initially feared, he added, while recent official figures have confirmed that Britain’s labor market is still firing on all cylinders with little impact since the end of the leave.
But the Bank still faces a tough decision, given the hit to consumers’ pockets from looming energy bills and rising fuel prices – which policymakers are powerless to control with rate hikes.
Governor Andrew Bailey recently told MPs there were also worrying signs that inflationary pressures could last longer than previously thought, with wholesale energy prices now very high and likely to last until in the second half of 2023.
He also warned of recent signals of broader wage increases across the UK economy.
Laith Khalaf, head of investment analysis at AJ Bell, said: “The Bank of England cannot control the major factors that will drive up inflation in the immediate future, such as global energy prices. or high shipping costs.
“But a rate hike in February would help persuade the market that the Bank is really serious and help stave off embedded inflationary expectations that could trigger a dreaded wage-price spiral.”
Economists are divided on the number of rate hikes this year, but many believe the Bank will be more cautious with the pace, especially if it begins to scale back its £895bn quantitative easing programme.
The Bank has already said it will consider so-called quantitative tightening when rates hit 0.5%, meaning it could make the announcement alongside Thursday’s decision and see it lead the charge among peers. of the central bank.